Timing is everything, as the saying goes. Market conditions over the last two years have shown that the temptation to time bear and bull runs can be costly to most investors. In fact, the Hartford Fund illustrates how timing the market is nearly impossible, and would have cost an average investor 83% in returns had they missed the 30 best days of trading in the past 30 years.
How does timing work for non-correlated assets like venture capital, especially in cases of nascent technologies? Beyond deal access and liquidity, timing the boom of a new technology is one of the most significant and costly challenges of venture investing. If missing the best 30 days of trading in the past 30 years would have cost 83% in realized returns, what would be the cost of missing out on investing in, say, Netflix (NFLX)? Depending on the source, around 1,300%.
Despite the recent retreat in venture valuations and stark warnings of the end of outsized returns, there are many exciting spaces well within the venture investing time horizon worthy of an investor’s attention. One of those areas is Extended Reality (XR), a term that captures all technologies that alters our perceptions of reality (Virtual/Augmented/Mixed).
If you have followed Meta (META) or Apple (AAPL), you would have undoubtedly heard of the Metaverse or the Apple Glass. These technologies will no doubt usher in an era of mass consumed XR. From healthcare, education, manufacturing, gaming, and even combat aviation, the application for XR will fundamentally change how we interact in the digital and physical worlds.
The global XR market size is expected to be worth $300B by 2024 and $1T by 2030. The biggest question is not whether XR will have mass adoption, but what the timeline is for mass adoption. The use cases and potential of XR, as well as the investments in the space make it a near certainty that we will see the concept of reality change in our lifetimes.
While there are many ways to gauge when a market may be prime for investment, there is no magic bullet to predict the sought after “hockey stick.” Some of the more technical aspects of market research can include deep dives into device shipments, broadband and 5G penetration rates, surveys and interviews with procurement managers, and so on. In keeping with the KISS principle however, an approach to timing the XR market can be to answer the 4Cs: Commercialization, Content, Cost, and Consumption.
- Commercialization – is there currently commercial application and use of XR?
- Cost – are device prices at a price point that it is accessible to most consumers?
- Content – beyond hardware, is there enough content being created by developers and creatives to keep consumers engaged; and
- Consumption – have people decided to consume what XR has to offer as a normal part of their lives?
Like most new technologies, early adopters (industry and hobbyists) pay a significant premium as manufacturing costs have not been optimized for a large and supported market. As markets become larger and more entrants compete, there is an incentive to increase manufacturing efficiencies and to differentiate on pricing. This further creates opportunities for more consumers to enter the market at a lower price point, and with each additional consumer comes an increase in market size that attracts the attention of even more manufacturers and supporting industries that create an ecosystem. The technology adoption cycle has happened with computers, the internet, smart TVs, and smartphones as recent examples.
However, the lifecycle is not limited to just recent technology, especially when viewed with the added context of the business S curve. If the XR market exhibits similar behaviors of its predecessors, the optimal point of entry would be after early adoption and before late majority: the sweet spot known as early majority. It is in this phase that the risk of being too early is significantly lowered, but there is enough room for outsized returns before the hockey stick.
Our view at Covenant is that we have already entered the “chasm of XR” and that the sweet spot will likely be here in the next 4-7 years. With the increased support of the Metaverse and soon, Apple Glass, the market continues to gain momentum every day. There are of course unforeseen headwinds that could slow this timeline, but our view is that the time and opportunity to invest in an XR unicorn is around the corner.
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